federal tax considerations for life insurance and annuities

modified endowment contract

Any cash value life insurance policy that develops cash value faster than a seven-pay whole life contract is called a Modified Endowment Contract. It loses the benefits of a standard life contract.

section 1035 time limit

Section 1035 of the Internal Revenue Code does not give a specific time limit to complete such an exchange. same to same exchange

interest settlement option ( on interest)

The death benefit is not income taxable; any interest earned is income taxable.

exclusion ratio

is used to determine the annuity amounts that should be excluded from taxes. During the accumulation phase, the contributions to the annuity have already been taxed. Therefore, the contributions are not taxed during the income period.

When money is withdrawn from the annuity during the accumulation phase,

the amounts are taxed on a last in first out basis (LIFO). Therefore, all withdrawals will be taxable until the owner's cost basis is reached. the 10% penalty will be imposed if under age 59 ½.

modified endowment contract

Any cash value life insurance policy that develops cash value faster than a seven-pay whole life contract is called a Modified Endowment Contract. It loses the benefits of a standard life contract. All withdrawals are subject to taxation on a LIFO basis, and if withdrawals are made earlier than the age of 59½, a 10% penalty is imposed.

policy loans

Money borrowed from the cash value is not taxable. Policy loans can be repaid at any time, including surrender and death. An insurer can charge interest on outstanding policy loans.

when would life insurance policy proceeds be included in the insured's taxable estate? A

If the insured were the owner of the policy at the time of death or possessed any incidents of ownership at the time of death, the value of the policy will be included in the insured's taxable estate. If the insured, as policyowner, assigns or transfers ownership of the policy or makes a gift of the policy within 3 years prior to his or her death, the entire face amount of the policy will be included in his or her taxable estate.

exclusion ratio

Some parts of an annuities payment are taxable, while others are not. The return of the principal paid in is nontaxable. The portion that is taxable is the actual amount of payment, less the expected return of the principal paid in.